A Global Tipping Point: Half The World Is Now Middle Class Or Wealthier

Something
of enormous global significance is happening almost without notice. For the
first time since agriculture-based civilization began 10,000 years ago, the
majority of humankind is no longer poor or vulnerable to falling into poverty.
By our calculations, as of this month, just over 50 percent of the world’s
population, or some 3.8 billion people, live in households with enough
discretionary expenditure to be considered “middle class” or “rich.”

About
the same number of people are living in households that are poor or vulnerable
to poverty. So September 2018 marks a global tipping point. After this, for the
first time ever, the poor and vulnerable will no longer be a majority in the
world. Barring some unfortunate global economic setback, this marks the start
of a new era of a middle-class majority.

We
make these claims based on a classification of households into those in extreme
poverty (households spending below $1.90 per person per day) and those in the
middle class (households spending $11-110 per day per person in 2011 purchasing
power parity, or PPP). Two other groups round out our classification:
vulnerable households fall between those in poverty and the middle class; and
those who are at the top of the distribution who are classified as “rich.”Authors

Our
“middle class” classification was first developed in 2010 and has been used by
many researchers. While acknowledging that the middle class does not have a
precise definition that can be globally applied, the threshold we use in this
work has the following characteristics: those in the middle class have some
discretionary income that can be used to buy consumer durables like
motorcycles, refrigerators, or washing machines. They can afford to go to
movies or indulge in other forms of entertainment. They may take vacations. And
they are reasonably confident that they and their family can weather an
economic shock—like illness or a spell of unemployment—without falling back
into extreme poverty.

By
classifying all households in the world into one of these four groups, using income
and expenditure surveys from 188 countries, we are able to derive measures of
the global distribution of income. Our social enterprise World Data Lab—the
maker of World Poverty Clock

A
lot has been written about the world’s progress in reducing the number of
people living in extreme poverty, as highlighted in the recent Goalkeepers
report put out by the Bill and Melinda Gates Foundation. We believe that
another story relates to the rapid emergence of the global middle class. This
middle class story is probably bigger in terms of the number of people affected.
In the world today, about one person escapes extreme poverty every second; but
five people a second are entering the middle class. The rich are growing too,
but at a far smaller rate (1 person every 2 seconds).

Why
does it matter that a middle-class tipping point has been reached and that the
middle class is the most rapidly growing segment of the global income
distribution? Because the middle class drive demand in the global economy and
because the middle class are far more demanding of their governments.

Consider
the structure of global economic demand. Private household consumption accounts
for about half of global demand (the other half is evenly split between
investment and government consumption). Two-thirds of household consumption
comes from the middle class. The rich spend more per person, but are too few in
number to drive the global economy. The poor and vulnerable are numerous, but
have too little income to spend. For most businesses, the sweet spot to target
is the middle class. This has long been true in individual advanced economies;
it is now true on a global scale.

Targeting
the global middle class is not easy. The middle class like differentiated
products, and their tastes will vary from country to country. The new middle
class is predominantly Asian—almost nine in 10 of the next billion middle-class
consumers will be Asian—but they are spread out in China, India, and South and
South East Asia. It’s no accident that the latest Hollywood hit is Crazy Rich
Asians or that Asian multinationals are emerging that have built a domestic
brand and now look to compete abroad.

The
middle class is already the largest segment of demand in the global economy.
What makes it interesting for business is that it is also the most rapidly
growing segment, projected to reach some 4 billion people by end 2020 and 5.3
billion people by 2030. Compared to today, the middle class in 2030 will have
1.7 billion more people, while the vulnerable group will have 900 million fewer
people. Trends for the poor and the rich and more modest, at -150 million
people and +100 million, respectively.

By
our calculations, the middle-class markets in China and India in 2030 will
account for $14.1 trillion and $12.3 trillion, respectively, comparable in size
to a U.S. middle-class market at that time of $15.9 trillion.

In
most countries, there is a clear relationship between the fate of the middle
class and the happiness of the population. According to the Gallup World Poll,
new entrants into the middle class are noticeably happier than those stuck in
poverty or in vulnerable households. Conversely, individuals in countries where
the middle class is shrinking report greater degrees of personal stress. The
middle class also puts pressure on governments to perform better. They look to
their governments to provide affordable housing, education, and universal
health care.

They
rely on public safety nets to help them in sickness, unemployment or old age.
But they resist efforts of governments to impose taxes to pay the bills. This
complicates the politics of middle-class societies, so they range from
autocratic to liberal democracies. Many advanced and middle-income countries
today are struggling to find a set of politics that can satisfy a broad
middle-class majority.

The
tipping point in the world today offers opportunities for business but
complications for policymakers.

Martin
Hofer and Jasmin Baier contributed to the analysis and content of this blog.
For more information please contact Kristofer Hamel at kristofer.hamel@worlddata.io.